Hey, Slick!

Last night on the PBS News Hour, BP spokeswoman Ayana Mcintosh-Lee said in response to a question about the Deepwater Horizon oil spill, "Well, we have some of the best minds working on this. And they are working around the clock in areas in Houston, in London, as well as here in Houma..."

OK, these are the same best minds that created an ultra-deepwater dynamic positioned semi-submersible oil rig with a blow-out valve that was supposed to prevent spills? Actually, not! The drilling rig was built by a Korean Company, Hyundai Heavy Industries. I guess work isn't going on in Korea.

The political impact of the spill is already starting (here and here), especially since the Obama administration wants more drilling off the US East coast. Before the spin and back pedaling starts, we should understand this event as part of the diminishing returns associated with the approach of Peak Oil. Ultra-deep wells are necessary because the easy-to-reach deposits have already been tapped. Evidently, the engineering on ultra-deep water wells is not quite up to the task and the externality in this case could become a major environmental nightmare.

The case for "drill, baby, drill!" or in this case "spill, baby, spill!" has never made much sense. More drilling means both more carbon in the atmosphere and more environmental degradation. Federal R&D for carbon-neutral technology deserves a strong influx of funds (probably on the order of what will be spent cleaning up the BP Spill), but isn't getting it. Oh, wait a minute, the Oil & Gas Industry make huge campaign contributions. Solar cell, wind-turbine, geo-thermal and other renewable energy industries aren't even on the list.

Turn Off the Bubble Machine

Today on NPR, Michelle Norris interviewed Lloyd Blankfein, the CEO of Goldman Sachs. When asked what Goldman might do in the future to prevent Financial Crises, Blankfein said "...recognize bubbles." On April 27, NOVA presented "Mind Over Money" asking "Can markets be rational when humans aren't?" Taken together, the Blankfein interview and the NOVA program beg a lot of questions.

First, it's not difficult to recognize bubbles (see earlier posts here). Even if Goldman were smart enough to recognize bubbles (I assume they are since they are the "smart money"), it's not their job. What would they tell the "dumb money"? Sorry, we won't place your bets! What would remain of investment banking? In fact, Matt Taibbi thinks Goldman Sachs is "The Great American Bubble Machine." If we wait for Mr. Blankfein and Goldman to recognize and do something about bubbles, we'll be waiting a long time.

How about the Federal Reserve? The Fed also failed to recognize past bubbles since it is the Fed's job to create growth rather than keep the economy from growing too fast.

How about the short-sellers who recognized the bubble and bet against it? They did their job and made a lot of "smart" money, but short-selling neither created nor defused the bubble.

Are there any other institutions that have the power to recognize and control bubbles? I can't find any and I'm not sure that breaking up Goldman would actually solve anything.

As with a lot of political issues, we probably aren't looking at the root cause. Since, 1990 there has been a sharp increase in the share of pre-tax household income held by the top 1% in the US. In 2005, it had almost reached 20%, the same level it had reached in 1929 before the Great Crash. There's a lot of money being held by people who's only objective is to make more money and Goldman is there to help them out (smart) or relieve them of their burden (dumb).

Even Alan Greenspan thinks income inequality is a problem (but doesn't connect it with bubbles) and the cause appears to lie in US politics.

Health Care Reform: The Day After Tomorrow

The New York Times is calling passage of health care reform legislation "A Big Win for Obama, but at What Cost?" Lost was the promise of a "postpartisan" Washington. Actually, I see this as a win. Obama's bipartisanship verged on being naive. The Republican party as it is now configured will never embrace bipartisanship and health care reform was substantially weakened trying to attract Republican votes.

Bipartisanship is a nice idea but it is also import to get things done and there's lots remaining to get done: financial reform, climate legislation, immigration reform, repairing international relationships, ending two wars, etc. The Democrats now realize that they can get something done. It's difficult. Maybe they don't have the energy for the struggle. My advice would be to ram through as much legislation as possible before the mid-term elections and run on accomplishments.

Back to health care, a lot remains to be done to strengthen reform. The current bill is a "Boon for Hospitals and Drug Makers." Here's another lesson for the Democratic party. You've picked off one of the interest groups, the Health Insurance Lobby. Now take on each of the other interest groups one at a time: hospitals, drug companies and physicians. The physicians could be easy. Congress must reauthorize increases in Medicare physician payments, the "Doc Fix," or physicians will face a 21 percent pay cut. Twenty-one percent is close to the right number for required reductions in physician payments (the actual number is 32 percent). Forget the "Doc Fix," pass legislation that requires physicians to accept Medicare payments and move on to the other interest groups.

Should We Sequester Carbon?

When people talk about "clean coal" (for example, President Obama) they're really talking about carbon sequestration, a geoengineering approach for the long-term storage of carbon dioxide. Let's see if this is a good or even practical idea.

Here's a simple model taken from Nikiforoff (1959). The dark lines show combustion of fossil fuels and the sequestration of atmospheric CO2. These are industrial, capital intensive activities that work in parallel with natural processes that deal with atmospheric CO2.

QUESTION: Why do we have to rely on carbon sequestration when there is a perfectly good process already in place called the natural carbon cycle? Natural systems already do a better job of carbon fixation. Living matter converts CO2 in the atmosphere into organic compounds (usually sugars) through photosynthesis. Living matter also returns CO2 to the atmosphere through ecosystem respiration. When living matter dies it turns into humus through the process of humification (the stuff you eat with pita bread at a Middle Eastern restaurant is hummus) and then returns to the earth through carbon fixation.

ANSWER: Neoliberal economists have convinced us that capital can always be substituted for natural resources. Here's an example involving natural ecosystem services where it doesn't work. The natural carbon cycle is in equilibrium. Data from the 1990's suggests that we would need to sequester about 6.4 Gt/yr of carbon to bring the systems back into balance--every year for the rest of eternity even if we cap emissions at today's levels (if we don't cap emissions, the 6.4 Gt/yr number will increase exponentially). Does anyone other than a neoliberal economist think this is a practical idea?

A somewhat better response is the UN REDD program (Reducing Emissions from Deforestation and forest Degradation). Unfortunately, reforestation competes with other land uses: food production, livestock grazing and living space for further economic growth (for example, parking lots so that the projected world population of between 5 billion and 14 billion people in 2100 can all have three automobiles and a place to part them).

A better response would be to reduce exponential growth rates and give the environment some time to recover and give us some time to figure out how to live in balance with the biosphere (sometimes called the precautionary principle). The alternative response is to look at sequestration as a marginal part of of a "policy wedge" approach, which would seem to be the way the Obama administration is going. If they play the Stabilization Wedge Game they have until 2056 to get back to 2006 emission levels and then from there get to sustainable emission levels. Do you think they will be successful?

Should We Control Direct-to-Consumer Advertising of Pharmaceuticals?

The brief answer, following up on an earlier post, is NO! We need to be more concerned about the promotional impact of free-samples. Free-samples, handed out by physicians, hook both the patient and the physician on future, insurance-supported payments for expensive patented vs. less expensive generic drugs.

If you're interested in how the promotional process works and how important free samples are to kicking off a promotional campaign, you can read my recently published paper here (WARNING: it's technical and statistical).

The Gold Mine at Goldman Sachs

On the PBS News Hour, Paul Solman just completed a two-part series "Making Sen$e: Inside Golman Sachs, Record Profits." Some interesting points were made: (1) contrary to CEO Lloyd Blankfein's testimony before Congress, GS is making most of it's money out of its own account (about 10% of its business is reported as generated from client funds), (2) which raises the possibility of front running (using advance knowledge of client trades to make advance purchases of it's own securities), (3) which makes me wonder why anyone would put their money with GS and (2) why the Fed thought they might qualify as a "lending institution" for the TARP program?

Oh, wait! Two prior Treasury Secretaries, Robert Rubin and Hank Paulson were Goldman employees before their brief stint as federal government employees. Does it make your stomach a little queasy?